The Impact of the Supreme Court’s Recent Halliburton Decision on Securities Litigation

On June 23, 2014, the Supreme Court issued its long-awaited decision in Halliburton Co. v. Erica P. John Fund, Inc. In Halliburton, the Court declined to overrule Basic v. Levinson, but rather imposed limitations on the “fraud-on-the-market theory,” making it easier for securities class action defendants to defeat class certification.

A. Background

In order to recover damages for violations of Section 10(b) of the Securities Exchange Act of 1934, plaintiffs must prove, among other things, that they relied on misrepresentations or omissions when they purchased or sold a security.

In Basic, the Supreme Court adopted the “fraud-on-the-market” theory. Recognizing that requiring each plaintiff to show individualized reliance would effectively negate the ability of plaintiffs to pursue securities class actions, the Court held that in certain circumstances, plaintiffs can satisfy the reliance element by invoking a rebuttable presumption of reliance, rather than requiring each plaintiff to prove direct reliance on an alleged misrepresentation. This presumption – the “fraud-on-the-market” theory – is premised on the economic theory that the market price of securities in well developed markets reflects publicly available information and, therefore, alleged misrepresentations are already accounted for in the price of the security and need not be independently proven for each plaintiff.